U.K. Banks: Looking At The Facts Rather Than Received Wisdom - March 4, 2019 AUTHORS - Home | S&P Global Ratings
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AUTHORS Nigel Greenwood Richard Barnes RESEARCH CONTRIBUTOR Fabrizio Serafini U.K. Banks: Looking At The Facts Rather Than Received Wisdom March 4, 2019
Contents Key Takeaways 3 Our Base-Case Outlook 4 Results 9 Macro Themes 24 Banking Themes 33 Related Research 37 Analytical Contacts 38 Disclaimer 39 www.spglobal.com/ratingsdirect March 4, 2019 2
Key Takeaways — S&P Global Ratings expects U.K. banks to demonstrate resilience in 2019. Based on their 2018 financial results and updated capital policies, the starting point incorporates our view of their healthy regulatory capital and leverage ratios, unusually high liquidity balances, strong progress made on MREL targets, excellent asset quality, improving statutory earnings, and stable strategic focus. — But, banks are ultimately a function of the economy that they serve and the U.K. economy is slowing. And, political risk in 2019 in relation to Brexit is undoubtedly the key risk to bank ratings. — We believe that a no-deal Brexit would be detrimental to the U.K. economy, which in turn could result in negative rating action on U.K. banks. In these circumstances, in the near term, any rating action would likely be limited to bank-specific outlook revisions rather than downgrades. — History shows that credit losses spike, rather than accumulate gradually, when an economy enters a recession. Current credit losses are benign, at an average of about 0.2% across the top-six U.K. banks in 2018, compared to the 30-year average of around 0.7%. Low interest rates and high employment rates underpin this outcome. — In the late-2018 Bank of England stress test--which all of the tested banks passed--the five-year cumulative stressed loss rate for domestic lending was 4.7%, ranging from 1.7% for mortgages to 27.6% for consumer credit. This compares to around 1.0% over the benign five years to 2018. The stress test assumed a 4.7% fall in U.K. GDP and a 33% decline in house prices, among other variables. — Such an outcome, we think, could lead to impairments rising to an annual average of 20%-30% of revenues from the current 3%-7%, absent management actions, which would clearly crimp but may not derail our view of the capitalization of the four major banking groups; less diverse banks may be more affected. — We assume that bank management will also remain focused on competitive trends, operational risks, and technology investment needs as the banking industry continues to evolve. — We expect that revenue growth may be hard to achieve given pressures on new mortgage spreads, a general slowdown in total lending growth, the increasingly likely absence of base rate rises, and difficulties in expanding noninterest income. — Past actions on cost control are starting to bear fruit, but in some respects the ongoing need to invest in the business and digital capability is negating these. — We assume that conduct and litigation charges will be less material. — Across the eight largest rated U.K. banking groups, six have a stable outlook and two have a positive outlook (RBS in relation to its intrinsic creditworthiness, and Nationwide Building Society in relation to our view of its additional loss-absorbing capacity). www.spglobal.com/ratingsdirect March 4, 2019 3
Our Base-Case Outlook For U.K. Banks In 2019 Is Stable Worsening Neutral Improving We expect domestic net interest income to be flat or moderately lower, reflecting modest net lending growth and continued mortgage market competition. Margin prospects look stronger in certain international markets--including Revenues Hong Kong and the U.S.--which are important markets for some U.K. banks. Fee & commission income will depend on capital markets activity and market valuations, among other factors We expect the sector will maintain close control of business-as-usual operating costs, partly to create headroom for technology investments, but also to support earnings. For several banks, we expect an absolute reduction in Costs expenses due to process improvements and operational simplification. Domestic credit losses have been extremely low in recent years and our base-case expectation is a moderate increase in 2019. We base our expectation on ongoing pressure on certain corporates, such as the retail and Credit Quality business services sectors, and the seasoning of the recent uptick in consumer credit lending (which is now slowing). We expect the subdued revenue outlook to limit earnings prospects and domestic pretax earnings to remain broadly stable. Certain international markets appear to offer greater upside. Profitability We expect most banks will maintain their capital ratios around the current levels. Capital To mitigate potential adverse changes in funding costs and availability as Brexit approaches, U.K. banks maintain comfortable liquid asset portfolios and pre-funded part of their 2019 debt issuance requirements last year. We expect Funding & Liquidity this conservative policy will provide resilience to their balance sheets. www.spglobal.com/ratingsdirect March 4, 2019 4
Shareholder Distributions Reflect The Increased Confidence Of Bank Boards Dividend per share (pence) 2016 2017 2018 Recent Announcements Barclays 3.0 3.0 6.5 None. HSBC 51 51 51 None, following $2bn buyback during 2018. (cents) A £1.75 billion buyback during 2019, following a £1 billion buyback during Lloyds 2.55 3.05 3.21 2018. RBS 0 0 4.5 A 7.5p per share special dividend (£904 million) Source: Company reports. www.spglobal.com/ratingsdirect March 4, 2019 5
The UGCP Of The Largest U.K. Groups Tends To Be At Or Below The ‘a-’ Median Of The Top-100 Global Banks 30 Lloyds, Nationwide, Largest U.K. Banks Standard Chartered Top 100 Banks* 25 20 No. of entities Barclays, Santander UK RBS 15 HSBC 10 5 0 aa- a+ a a- bbb+ bbb bbb- UGCP--Unsupported group credit profile. *Just those with UGCP of ‘bbb-‘ or higher. Source: S&P Global Ratings database. Data as of Feb. 22, 2019. www.spglobal.com/ratingsdirect March 4, 2019 6
Most Of The Top100 Banks Have A Stable Outlook, But Two U.K. Banks Are On Positive Outlook Negative 11% UK Positive 2% Positive 9% UK Stable 5% Stable 73% Data as of Feb. 22, 2019. The U.K. banks are Barclays, HSBC, Lloyds, Nationwide, RBS, Santander UK, and Standard Chartered. Source: S&P Global Ratings database. www.spglobal.com/ratingsdirect March 4, 2019 7
Intrinsic Creditworthiness Drives Positive Outlook On RBS; For Nationwide It’s ALAC AAA ALAC AA+ UGCP AA S Anchor AA- S A+ P S S S Outlook* A P A- S BBB+ BBB BBB- BB+ BB BB- HSBC Lloyds Nationwide Standard Barclays PLC Santander The Royal CYBG PLC Holdings PLC Banking Building Chartered UK Group Bank of Group PLC Society PLC Holdings PLC Scotland Group PLC UGCP--Unsupported group credit profile. ALAC--Additional loss-absorbing capacity.*P--Positive, S--Stable. All ratings relate to the main operating bank. Ratings as of Feb. 22, 2019. Source: S&P Global Ratings. www.spglobal.com/ratingsdirect March 4, 2019 8
Solid Headline 2018 Results Across The Board (bil. £, unless stated) Barclays HSBC* Lloyds RBS Total assets 1,133,283 2,020,918 797,598 694,235 % change versus 2017 0.0 1.4 (1.8) (5.9) Operating revenues 21,205 44,522 18,995 12,931 % change versus 2017 0.3 6.2 1.8 0.1 Noninterest expenses 14,036 26,062 9,500 7,322 % change versus 2017 (4.9) 5.9 (0.5) (2.7) Preprovision operating income 7,169 18,460 9,495 5,609 Pretax profit 3,494 15,713 5,960 3,359 Reported RoTE (Statutory) (%) 3.6 8.6 11.7 4.8 Reported RoTE (Underlying) (%) 8.5 10.2 15.5 10.9 Net interest income/average earning assets (%) 1.3 1.6 2.4 1.9 Noninterest expenses/operating revenues (%) 66.2 58.5 50.0 56.6 New loan loss provisions/average customer loans (%) 0.42 0.18 0.20 0.12 Gross NPA/total loans (%) 2.7 1.6 2.4 2.4 ECL allowance/gross NPAs (%) 77.0 53.7 36.6 43.6 Customer loans (net)/customer deposits (%) 83.0 72.0 116.5 85.8 *HSBC Holdings reports in U.S. dollars. We have converted the data to pounds sterling at the relevant exchange rates. The percentage changes are based on U.S. dollars. ECL--Expected credit losses. RoTE--Return on tangible equity. NPA--Nonperforming assets (Stage 3 loans+POCI+performing renegotiated loans). Source: S&P Global Ratings’ database and ratio definitions. www.spglobal.com/ratingsdirect March 4, 2019 9
Weaker Global Capital Markets, Not Domestic Banking, Affected Q4 Revenues Quarter over Year over (Bil. £, unless stated) Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 quarter (%) year (%) Barclays PLC 5.0 5.4 5.6 5.1 5.1 (1.1) 1.0 HSBC Holdings PLC* 12.3 13.7 13.6 13.8 12.7 (8.0) 3.2 Lloyds Banking Group PLC 4.6 4.6 4.9 4.7 4.6 (2.5) (1.3) The Royal Bank of Scotland 3.1 3.3 3.4 3.6 3.1 (16.0) 0.0 Group PLC Santander UK Group 1.2 1.2 1.2 1.1 1.1 (5.8) (7.9) Holdings PLC Source: Company reports. *Earnings reported in U.S. dollar. www.spglobal.com/ratingsdirect March 4, 2019 10
Improving Returns, And Underlying Returns Catching Up With Statutory 25 Statutory ROE 20 Underlying ROE 15 10 5 % 0 (5) (10) (15) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ROE--Return on equity. Figures cover Barclays, HSBC, Lloyds, and RBS, and are weighted by shareholders' equity. Underlying ROE excludes nonoperating items (mostly conduct, litigation, and restructuring costs). Source: Bank of England for 2005-2017 data, S&P Global Ratings for 2018. www.spglobal.com/ratingsdirect March 4, 2019 11
Profit Margins Are Also Recovering Well 60 Pretax margin 50 Preprovision income/revenues 40 margin 30 20 % 10 0 -10 -20 Data is based on 6-bank aggregate (Barclays, HSBC, Lloyds, Nationwide, RBS, and Santander UK). Data for Nationwide is 6M to Sept. 30, 2018 annualized. Source: S&P Global Ratings’ database and definitions, and company accounts. www.spglobal.com/ratingsdirect March 4, 2019 12
Net Interest Margins Are Holding Up Despite High Liquidity Levels And Mortgage Market Competition 4 2015 2016 3 2017 2 2018 % 1 0 Nationwide HSBC Holdings Santander UK The Royal Bank Lloyds Banking Barclays PLC Building PLC Group Holdings of Scotland Group PLC Society PLC Group PLC Data as of Dec. 31. Reported net interest margins: Barclays: net interest income to average customer assets (Barclays UK and Barclays International); HSBC: net interest income to average interest-earning assets; Lloyds: net interest income to average interest-earning banking assets; Nationwide: net interest income to assets (9M to Dec. 31, 2018, annualized); RBS: net interest income to interest-earning assets of the banking business; San UK: net interest income to average customer assets. Source: Company accounts. www.spglobal.com/ratingsdirect March 4, 2019 13
But Competition Pressures Are More Obvious At Mortgage-Biased Nationwide And Santander UK 3.5 Nationwide BS 3.0 Santander UK 2.5 Lloyds 2.0 % 1.5 1.0 0.5 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Data at Dec. 31, 2018. Nationwide's year-end is April 4 and data for 2018 is nine months to Dec. 31, 2018. Lloyds’ data for 2005-2008 is Lloyds TSB Group PLC. Source: Company accounts. www.spglobal.com/ratingsdirect March 4, 2019 14
Restructuring Costs No Longer A Material Factor; Ring-Fencing Cost The Industry Over £3 billion 7 7 Total restructuring costs (right scale) 6 6 Restructuring 5 5 costs/revenues (left scale) 4 4 Bil. £ % 3 3 2 2 1 1 0 0 2014 2015 2016 2017 2018 Chart based on Barclays, HSBC, Lloyds, and RBS. HSBC data converted from USD to GBP. RBS has stated that restructuring costs will be around £1.5 billion in 2019. Source: S&P Global Ratings' database and ratio definitions. www.spglobal.com/ratingsdirect March 4, 2019 15
Despite The Restructuring, The Cost-To- Income Ratio Has Yet To Fundamentally Improve 70 Average 2012-14 65 2018 60 55 % 50 45 40 Barclays PLC Nationwide HSBC Holdings The Royal Bank Santander UK Lloyds Banking Building Society PLC of Scotland Group Holdings Group plc Group PLC PLC Data as of Dec. 31, except Nationwide as of Sept. 30, then annualized. Source: S&P Global Ratings’ database and definitions. www.spglobal.com/ratingsdirect March 4, 2019 16
The Loan Loss Rate Remains Very Low; The Only Way Is Up 180 Annual impairment losses 160 Average for 1990-2018 140 120 100 Bps 80 60 40 20 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Data mainly based on unweighted average for Barclays, HSBC (HSBC Bank plc prior to 2018), Lloyds, Nationwide, RBS, and Santander UK. Data may not be fully comparable across all periods owing to changes in accounting standards. www.spglobal.com/ratingsdirect March 4, 2019 17
The Stock Of Non- And Under-Performing Loans Reduced In 2018 70 Jan. 1, 2018 60 Dec. 31, 2018 50 40 Bil. £ 30 20 10 0 Stage Stage Stage Stage Stage Stage Stage Stage Stage Stage Stage Stage 2* 2§ 3 2* 2§ 3 2* 2§ 3 2* 2§ 3 Barclays HSBC† Lloyds RBS *Not past due or 30 days past due. †Reports in US$. The amounts have been converted using the relative exchange rates. Source: Company reports. www.spglobal.com/ratingsdirect March 4, 2019 18
Problematic Loans Are Low And Coverage Appears Sound 18 50 Stage 2 loans / total loans (left scale) 16 45 40 Stage 3 loans / total 14 loans (left scale) 35 12 Stage 3 ECL allowance 30 / Stage 3 gross loans 10 (right scale) 25 % % 8 Stage 2 ECL allowance 20 / Stage 2 gross loans (right scale) 6 15 4 10 2 5 0 0 Barclays PLC HSBC Holdings PLC Lloyds Banking The Royal Bank of Group PLC Scotland Group plc Source: S&P Global Ratings’ database. www.spglobal.com/ratingsdirect March 4, 2019 19
Conduct And Litigation Charges Will Be Lower In 2019 16 14 12 10 Bil. £ 8 6 4 2 0 2014 2015 2016 2017 2018 *Based On Barclays, HSBC, Lloyds, and RBS. HSBC data converted from USD to GBP. At Dec. 31, 2018 the four banks combined had around £3.3 billion of balance sheet provisions to cover remaining PPI utilization through to the end-August 2019 PPI claims deadline. Source: S&P Global Ratings’ database. www.spglobal.com/ratingsdirect March 4, 2019 20
Regulatory Capital And Leverage Ratios Have Improved And We Expect Stability 7 6.5 CYBG 2018 RBS NBS Dec. 31, 2018: 6 HSBC CET 1 -- 31.7% 2012 U.K. Leverage -- 5% U.K. Leverage Ratio (%) 5.5 Lloyds 5 Barclays CYBG 4.5 Santander UK HSBC 4 3.5 NBS Santander UK 3 RBS Lloyds Barclays 2.5 2 7 9 11 13 15 17 19 Common Equity Tier 1 Ratio (%) Data as of Dec. 31, 2018. CYBG's CET1 ratio is at this date but its leverage ratio is at Sept. 30, 2018. Source: Company accounts. www.spglobal.com/ratingsdirect March 4, 2019 21
S&P Global Ratings’ Funding And Liquidity Metrics Remain Sound 2.5 RBS Broad liquid assets/short-term wholesale 2 Lloyds HSBC Barclays 1.5 funding (x) 1 0.5 0 95 100 105 110 115 120 125 130 Stable funding ratio (%) Source: S&P Global Ratings’ database. www.spglobal.com/ratingsdirect March 4, 2019 22
MREL Is Well Advanced MREL As A Proportion Of Regulatory Risk-Weighted Assets 35 32.6% 30.7% 30 28.1% Senior, 9.5% 26.6% Senior, 8.2% 25 Senior, 9.7% Senior, 7.2% T2, 4.7% % 20 T2, 3.9% AT1, 2.4% T2, 2.1% T2, 2.8% AT1, 3.6% 15 AT1, 3.1% AT1, 2.6% 10 CET1, 14.8% CET1, 16.2% CET1, 13.2% CET1, 14.0% 5 0 Lloyds RBS Barclays HSBC MREL--Minimum requirement for own funds and eligible liabilities. Data as of Dec 2018. Source: companies' fixed income presentations. www.spglobal.com/ratingsdirect March 4, 2019 23
Moving On To The Macro Themes, The Impact Of A No-Deal Brexit Could Be… GDP Unemployment Households lose Inflation peaks at House prices down 5.5% 7.4% £2,700 4.7% 10% below our baseline by 2021 in income per year in mid-2019 by 2020 forecast by 2021 2019-2021 Source: S&P Global Ratings’ No-Deal Brexit Scenario. www.spglobal.com/ratingsdirect March 4, 2019 24
Encouragingly, Consumer Credit Growth Has Slowed, But SME Loan Demand Remains Weak 12 Consumer credit (exc. Student loans) 10 Residential mortgages 8 SMEs Annual Rate (%) 6 Larger corporates 4 2 0 (2) (4) Oct 15 Oct 16 Oct 17 Oct 18 Jun 15 Jun 16 Jun 17 Jun 18 Apr 15 Apr 16 Apr 17 Apr 18 Aug 15 Aug 16 Aug 17 Aug 18 Feb 15 Feb 16 Feb 17 Feb 18 Dec 15 Dec 16 Dec 17 Dec 18 Source: Bank of England. www.spglobal.com/ratingsdirect March 4, 2019 25
And, The Mortgage Market Is Growing In Line With Nominal GDP Growth 400 Gross Lending 350 Net Lending 300 250 Bil. £ 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of England. www.spglobal.com/ratingsdirect March 4, 2019 26
New Mortgage Spreads Are Tight Owing To Heightened Competition From Over 30 Lenders Spread Of Two-Year Fixed Rate Over The Two-Year Swap 75% loan-to-value Rate 6 90% loan-to-value 5 4 3 % 2 1 0 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bank of England, Bloomberg. www.spglobal.com/ratingsdirect March 4, 2019 27
Banks Are Exposed To The Leveraged U.K. Consumer (Though The Trend Is More Benign Than In Some Markets) Total Household Debt/Gross Disposable Income 260 U.K. Netherlands 240 Sweden 220 U.S. 200 180 % 160 140 120 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: S&P Global Ratings’ database. www.spglobal.com/ratingsdirect March 4, 2019 28
The Composition Of Household Debt Has Become More Diverse Student debt is not held by the banks 2.0 Student Loans 7% Other Consumer Credit 6% 6% 8% Credit Card 5% 5% 7% 2% 2% 4% 4% 7% 2% 3% 3% 1.5 7% 7% 11% 11% Mortgage 2% 10% 8% 7% 7% 7% 9% 7% 11% 1% 11% 10% 10% 10% 11% 1% 13% 13% 12% 11% 11% 10% 1% 11% 14% 15% Tril. £ 1.0 1% 11% 15% 1% 12% 1% 16% 12% 17% 12% 74% 17% 76% 75% 17% 75% 78% 79% 79% 80% 79% 78% 77% 76% 0.5 75% 73% 72% 72% 70% 70% 70% 0.0 Source: Bank of England. www.spglobal.com/ratingsdirect March 4, 2019 29
House Price Growth Has Slowed, A Trend That Could Accelerate In 2019 But our base case is nominal growth of 1.5% in 2019 House Price Indices, Year-On-Year Change 16 London 14 U.K. 12 10 8 % 6 4 2 0 (2) Source: Land Registry. www.spglobal.com/ratingsdirect March 4, 2019 30
The Loan-To-Value Profile Of New Lending Has Not Weakened The slight uptick relates to the government's Help To Buy Scheme Systemwide Systemwide New NewLending by LTV Lending by LTV 60 Over 95% Over 90 < = 95% 50 Over 75 < = 90% 40 30 % 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of England. www.spglobal.com/ratingsdirect March 4, 2019 31
Mortgage Arrears Remain Very Benign Current foreclosures are the lowest on record Residential Mortgages In Arrears Or In Possession As A Proportion Of Total Mortgage Balances 4 10 % or more in arrears 7.5 < 10% in arrears 3 5 < 7.5% in arrears 2.5 < 5% in arrears Average: 2.17% 1.5 < 2.5% in arrears 2 % In possession 1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of England. www.spglobal.com/ratingsdirect March 4, 2019 32
In Terms Of Banking Themes, The PPI Story Is Nearing Its End, And Recent Trends Are Better Monthly Payment Protection Insurance Payouts 800 Monthly PPI payouts 700 Mean for each 600 calendar year 500 bil. £ 400 300 200 100 0 Source: Financial Conduct Authority. www.spglobal.com/ratingsdirect March 4, 2019 33
“Challenger Banks” Make Up A Meaningful Part Of The Banking Landscape They are growing much faster but the ring-fenced banks are starting to ‘fight back’ Banks' Gross Loans Challenger Banks' Gross Loans Lloyds Banking Group 80 PLC £444 bil. 70 10% Challenger banks £350 60 23% bil. 50 Bil. £ 10% RBS (UK loans) £273 bil. 40 30 Barclays (UK loans) £240 20 12% bil. 10 18% HSBC (UK loans) £227 bil. 0 The Paragon Group… Principality Building… Co-operative Bank PLC… Tesco Personal Finance… Coventry Building Society Leeds Building Society FCE Bank PLC Yorkshire Building Society Bank of Ireland (UK) PLC Metro Bank PLC Aldermore Bank PLC OneSavings Bank PLC Skipton Building Society CYBG PLC TSB Banking Group PLC AIB Group (U.K.) PLC Shawbrook Bank Ltd Sainsbury's Bank plc 12% 14% Santander UK Group Holdings PLC £200 bil. Nationwide Building Society £198 bil. Source: S&P Global Ratings’ database and company accounts. Data as of latest reports. www.spglobal.com/ratingsdirect March 4, 2019 34
Rating Components For Rated U.K. Financial Institutions Core opco Notches Holdco long- Business Capital & Risk Funding & UGCP/ Type of long-term of term ICR/ position earnings position liquidity SACP support ICR/outlook support outlook AIB Group (UK) PLC BBB/Stable Weak Strong Weak Avg/Adequate bb+ Group 2 N/A Barclays PLC* A/Stable Adequate Strong Moderate Avg/Adequate bbb+ ALAC 2 BBB/Stable CYBG PLC* BBB+/Stable Moderate Adequate Adequate Avg/Adequate bbb ALAC 1 BBB-/Stable Below FCE Bank PLC BBB/Negative Weak Strong Adequate bbb- Group 1 N/A Avg/Adequate Handelsbanken PLC AA-/Stable 1 N/A Above HSBC Holdings PLC* AA-/Stable Very Strong Adequate Strong a+ ALAC 1 A/Stable Avg/Adequate Lloyds Banking Group A+/Stable Strong Adequate Adequate Avg/Adequate a- ALAC 2 BBB+/Stable PLC* Nationwide Building A/Positive Adequate Strong Adequate Avg/Adequate a- ALAC 1 N/A Society The Royal Bank of A-/Positive Adequate Adequate Moderate Avg/Adequate bbb ALAC 2 BBB-/Positive Scotland Group PLC* Santander UK Group A/Stable Adequate Adequate Adequate Avg/Adequate bbb+ ALAC 2 BBB/Stable Holdings PLC* Standard Chartered Above Avg/ A/Stable Adequate Strong Moderate a- ALAC 1 BBB+/Stable PLC* Strong ALAC--Additional loss-absorbing capacity. ICR--Issuer credit rating. SACP--Stand-alone credit profile. UGCP--Unsupported group credit profile. In each case the anchor is 'bbb+'. *These scores reflect the group credit profile construct. Source: S&P Global Ratings. www.spglobal.com/ratingsdirect March 4, 2019 35
Rated U.K.-Incorporated Ring-Fenced And Non-Ring-Fenced Bank Entities Group Ring-fenced banks Non-ring-fenced banks Barclays Core: A/Stable/A-1 ICR: A+/A-1 RCR Core: A/Stable/A-1 ICR; A+/A-1 RCR Barclays Bank UK PLC Barclays Bank PLC HSBC Core: AA-/Stable/A-1+ ICR; AA-/A-1+ RCR Core: AA-/Stable/A-1+ ICR; AA-/A-1+ RCR HSBC UK Bank PLC HSBC Bank plc Lloyds Core: A+/Stable/A-1 ICR; AA-/A-1+ RCR Highly strategic: A/Stable/A-1 ICR; A+/A-1 RCR Bank of Scotland PLC Lloyds Bank Corporate Markets plc Lloyds Bank PLC RBS Core: A-/Positive/A-2 ICR; A/A-1 RCR Highly strategic: BBB+/Positive/A-2 ICR; A-/A-2 RCR National Westminster Bank PLC NatWest Markets Plc The Royal Bank of Scotland PLC Ulster Bank Limited Santander UK Core: A/Stable/A-1 ICR; A+/A-1 RCR N/A* Santander UK PLC ICR--Issuer credit rating. N/A--Not applicable. RCR--Resolution counterparty rating. Each cell shows the group status, ICR, RCR and relevant legal entity names. *Banco Santander S.A.’s London branch acts as the non-ring fenced entity. Source: S&P Global Ratings. www.spglobal.com/ratingsdirect March 4, 2019 36
Related Research — The Top Trends Shaping European Bank Ratings In 2019, Feb. 28, 2019 — Failure To Win U.K. Business Banking Fund Is A Setback To CYBG'S Expansion Plans, Feb. 22, 2019 — Europe's Housing Markets Ease Off The Accelerator, Feb. 19, 2019 — Countdown To Brexit: Rating Implications Of A No-Deal Brexit, Feb. 6, 2019 — The 2019 Outlook For U.K. Banks Hinges on Brexit, Jan. 10, 2019 — Everyone Passed: Stress Tests Highlight Growing Resilience Of U.K. Banks, Nov. 29, 2018 — Banking Industry Country Risk Assessment: United Kingdom, Nov. 5, 2018 — Ratings On The United Kingdom Affirmed At 'AA/A-1+'; Outlook Remains Negative, Oct. 26, 2018 — Countdown To Brexit: Financial Institutions Are Past The Point Of No Return, Oct. 11, 2018 — Rearranged And Ready: U.K. Banks Are On Track For Ring-Fencing, Aug. 15, 2018 — Our Credit Loss Estimates For U.K. Banks: 2018-2020, June 7, 2018 www.spglobal.com/ratingsdirect March 4, 2019 37
Analytical Contacts Author Author Research Contributor Nigel Greenwood Richard Barnes Fabrizio Serafini London London London + 44 20 7176 1066 +44 20 7176 7227 +44 20 7176 0339 nigel.greenwood richard.barnes fabrizio.serafini @spglobal.com @spglobal.com @spglobal.com www.spglobal.com/ratingsdirect March 4, 2019 38
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